What happened

Etsy (ETSY -1.41%) shares trounced a rising market last month. The niche e-commerce company's stock rose 18% in August as the S&P 500 gained 1.2%, according to data provided by S&P Global Market Intelligence.

The company's surge can be tied right to the encouraging earnings update that management issued early in the month.

A young woman shopping online.

Image source: Getty Images.

So what

The stock initially fell following that report, as investors' first reaction was to worry about slowing growth. Etsy's sales gains decelerated to 23% in Q2, compared to revenue growth of more than 100% year over year in previous quarters. Wall Street was also underwhelmed with management's third-quarter outlook, which predicts another slowdown to growth of about 13%.

However, that forecast still translates to a much stronger business than Etsy had immediately preceding the pandemic. Like bigger peers such as eBay, the company also has a prime opportunity to boost its margins as it adds value to the platform. Its take rate is above 17% of sales, compared to about 11% for eBay.

Now what

The main factors that will influence Etsy's long-term returns are how well it can attract buyers and sellers to its platform, and keep them using it. It is having no trouble in either metric so far in 2021. It gained buyers last quarter, for example, at double the rate from the same period in 2019.

Stats like that imply that Etsy is nowhere close to exhausting the reach of its marketplace. That means investors may see many more strong earnings reports to come. But the stock's early August decline should also be a reminder that shareholders need to be ready for plenty of volatility from this growth stock.